In this episode of the “GILTI Conscience” podcast, Kroll directors Ryan Lange and Kerim Keser and Skadden partner Johannes Frey join our hosts Nate Carden and David Farhat to explore the details of the German nonresident IP withholding tax. They discuss taxation questions that are still up in the air, how the rule could affect multinational corporations, the valuation of intellectual property (IP) registration and the best steps to take if you owe taxes under this law. 

Originally implemented in 1925, the German nonresident IP withholding tax is coming back into the public eye after years of inactivity. The tax law states that if a foreign resident company has an IP registered in Germany, it may be subject to German nonresident taxation. However, uncertainty remains around authorities’ ruling on the tax, the process for determining tax requirements and to whom the tax applies.

At present, it remains unclear which types of multinationals are affected by this tax law. However, tax experts advise that companies with an IP registered in Germany cover their bases in order to avoid an audit, interest risk, liability risk and even corporate risk. This means companies should disclose their situation to German authorities. 

💡 Featured Guests 💡

Name: Ryan Lange

What he does: Ryan is a Director in Kroll’s Chicago Transfer Pricing practice, and he advises clients’ senior management on a variety of issues related to transfer pricing, economics, and valuation. He has over 12 years of experience providing advice to companies spanning all sizes and industries. Ryan is a leader within the Chicago Tax Club and has chaired the international tax committee for the past five years. Additionally, he has co-authored various articles and frequently speaks on transfer pricing topics at both domestic and international conferences. 

Organization: Kroll

Connect: LinkedIn



Name: Kerim Keser

What he does: Kerim is a Managing Director in Kroll’s Munich office and leads Kroll German, Swiss, and Austrian transfer pricing activities. He has 15 years of transfer pricing experience in consulting firms and at the Australian Taxation Office. He has extensive experience developing transfer pricing solutions for companies and advising across industries, including automotive, consumer products, pharmaceuticals, technology, and financial services. 

Organization: Kroll

Connect: LinkedIn

Name: Johannes Frey

What he does: Johannes is a Partner in Skadden’s tax division. He has a broad transaction-oriented tax practice with an emphasis on corporate restructurings, acquisitions, spin-offs, joint ventures, and transactions involving cross-border tax planning. Johannes is named a leading lawyer in JUVE Wirtschaftskanzleien, Chambers Global, and Chambers Europe. He also was previously named by Wirtschaftswoche as one of the top 25 corporate tax lawyers in Germany and has repeatedly been named by Handelsblatt/Best Lawyers on its list of Germany’s Best Lawyers.

Organization: Skadden

Connect: LinkedIn

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GILTI Conscience is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. Skadden’s tax team is recognized globally for providing clients with creative and innovative solutions to their most pressing transactional, planning, and controversy challenges. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.

This is GILTI Conscience, casual discussions on transfer pricing, tax tradies, and related topics. A podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts, and tax administration trends. We also do dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now your hosts, Skadden partners, David Farhat and Nate Carden.

Hello all. Welcome back to GILTI Conscience. As usual, you're joined by Eman Cuyler, Stefane Victor, Nate Carden, and myself, David Farhat. We have a very interesting one today. We typically talk about transfer pricing and international tax issues. And today we actually have some international folks joining us to talk about a very interesting issue. The German non-resident IP withholding tax. This is a bit of a controversial one. This is one some of you may be dealing with and it's a old new rule. So before we jump in, I'm going to allow our guests to introduce themselves. Can I turn it over to you, Ryan?

Yes, absolutely. Thanks David. Happy to be here and talk with everyone today. My name is Ryan Lange. I'm a director in the transfer pricing group at Kroll and I am located in Chicago. So very happy to be here.

Welcome, Ryan.

Thank you.

Yeah. Same for me. Thanks a lot for inviting us. Pleasure to join. Kerim Keser. MD in the transfer pricing evaluation practice of Kroll located in the Munich office. And I'll give over to Johannes.

Thanks for having me. And my name is Johannes Frey. I am tech partner in the Frankfurt office of Skadden, and I'm very happy to be here.

Thanks all for joining. So Johannes, let me start with you. You've written an article on this and like I said, it's a bit controversial. Can you give us a little bit of background on this tax and why it may be causing some folks so many problems?

Absolutely. Well, this is a text which is very old. It was actually implemented already in 1925 and has been amended in 1934. And it has never been applied with respect to taxpayers, which are not resident in Germany. So that is a tax which the authorities think would apply if two taxpayers outside of Germany would license IP, which is registered in Germany. And all of a sudden in 2020, there were articles in the press out. And the authorities were not really knowing what to do about that. And there was actually also a discussion to abolish it, but in the end it was not abolished but was applied. So that's in a nutshell where we stand now.

How did it sit dormant for all these years and then all of a sudden come back to life? Is it something people just weren't paying attention to? Or is it a new interpretation or something else?

That's me guessing. I would think that the authorities and everybody, although the courts thought that there is no enough nexus, not enough link between the German authorities or the German jurisdiction and the respective license between two non Germans. So usually the concept would've been or was that only a license where a license store or a licensee is in Germany would be subject to German tax. And naturally you would not text a transaction where there is no linkage to Germany whatsoever, other than part of the rights, which are granted or registered in Germany.

So for folks out there who are new to this, maybe let's give them an example. If you have a US multinational company that licenses its IP to its operating headquarters in other country not Germany, Ireland, Switzerland, whatever the idea is that to the extent that the royalties relate to German registered rights, Germany would assert the ability to withhold, even though they're not on either side of the transaction?

That's exactly right, Nate. That's exactly right. And one additional problem here is that this came all of a sudden out of the blue and the authorities now try to analyze all cases since 2013. In 2013, nobody thought about that, obviously, because nobody applied this through it. So that's another angle which makes it much more complex.

So one obvious question is, how do they know?

Exactly?

Good question. Yeah. Good question. I think it's almost impossible to investigate the facts. It's also impossible to have a coherent strategy for the authorities to treat all taxpayers equally. So it's very difficult to find a system which treats them in a way that you say, "Okay. These are the taxpayer which are under investigations." All since 2013 without treating certain multinationals different from other multinationals.

And Ryan and Kerim, if I could throw it to you guys for a second, how does Germany then value this IP? How do we determine what exactly that the tax is based on?

David that's a question where we don't have, let's say, a definite answer. We have some ideas and there is a circular out there from the minister of finance explaining at least their expectations of that. And maybe ruling out some of the options, but it overall did surprise us as well. Since this is a classical area where the economists work with lawyers, they tell us they need the value of price and we do the pricing and the valuing. And here it was the question, but what are the valuing? So we talked a lot with lawyers saying, what is this?

So there is a circular out from the ministry of finance, which rules out to say, well, since it tied to registration in Germany, they don't want to see just the registration cost as a proportion of value and that will be subject to this tax. They rather think of this should be something of a, let's say income based approach, where whatever is paid for such registered IP that will be subject to. In a very high level, you can dive deeper if you want, but that's where they're coming from saying there is a payment for an IP that is registered in Germany and that claimed, we want a tax.

So we've talked a little bit about how the tax authority determines who owes the tax. That's cloudy. We talk about how to determine the tax. That's a bit cloudy. And I'll ask the last question, if I'm a taxpayer, how do I know that I'm subject to this? Is that more certain? Or am I just living with this risk?

I think you have to live with that risk. It's not certain at all because usually how these IP agreements work or that they cover all rights, all worldwide rights for certain topic. So they would not distinguish between Germany, France, China, Korea. And then in a possible scenario, you have actually a Chinese company entering into an agreement with an Indonesian company. Conceptually, they could cover German IP, but they would never need German IP. So under the agreement, if you read the agreement, literally you could say, arguably, there is German IP included, but how should an Indonesian company use German IP if it has not even a German branch or German subsidiary. So it's very cloudy here as well and that makes it almost in applicable.

Let's walk through that scenario you just described. I see how you described it, that there would be risk for this company now that they have signed the agreement between Indonesia and China, that has IP that's registered in Germany. How would then Germany tax that? Or how would they have a German tax liability? So can we just walk through some of those mechanics as to how the German tax authority would then reach in to tax this or the situation where they could have some risk there?

Absolutely. So one possibility is that the Indonesia or the Chinese company actually notifies the German authorities, then they would know. Another alternative would be that the German authorities would actually look into the German register and check whether there is an Indonesian company, which has a registered right in Germany and investigate visa research Indonesian, or Chinese company. But there are millions of companies which have registered rights in Germany. So it would an almost impossible task to do this. In my view, I'm not an IP lawyer, but I think it's almost impossible.

But if you don't do this on the other hand, if the authorities don't do that and just focus on the company, which actually disclose something, they don't treat everybody equally, obviously. And actually there's also case law with respect to interest income in the early two thousands where the constitutional court held that if you cannot really enforce a tax law equally, then this text law is not constitutional, it violates the equal treatment. And that's in my view, a very strong argument. And my view's very difficult for the authorities to reject this in a way that they say, "Okay. No, we treat everybody equally." I think it's almost impossible.

So would that be the strong challenge that one could present that it's almost impossible in that, I have a scenario to treat all taxpayers equally? Or is it the fact that this law that's been on the books for so long, hasn't been applied until recently, or that there's even a difficulty in determining the tax. There's so many ways that this is cloudy. So is that the strongest argument?

I think it is actually. And there is also a different angle to this unequal treatment. If you were, let's say a Chinese company and you did an IP transaction in 2014, you would not have expected that a German tax comes up because nobody applied it so far. Whereas entity would've known this and would've been able to structure in a way still efficient without being abusive in a way that German tax would not apply.

Though this I would call it retrospective application is by itself also quite critical and could be challenged based on unequal treatment as well. And that's actually even more true within the EU. I mean, we are here in a country, which is basically subject also to the EU freedoms. And interestingly enough, and Germany was very pushy on this Germany push that the EU freedoms are the same as the German basic rights. So you could make the same argument under law and EU law clearly pervades over German law. And you're absolutely right. Stefane, this unequal treatment would be one of the strongest arguments.

So where does it stand? Is anybody going to court on this?

I would expect that in the near future companies would go to court and in a way a court proceeding would lead to the opportunity that this respective German court could ask the European Court of Justice to review that, which would also be very interesting because under EU law, you can definitely not discriminate, but you can also not limit certain things like the freedom of capital. That would be clearly an infringement of the freedom of capital as well, if you have a capital transaction and that will be tax.

So that would be one possibility how this whole case could be solved. At the same time the federal finance ministry requested a report, which is due by the end of June of this year in order to see where the status quo is. And possibly the federal finance ministry would then take the few that this rule needs to be abolished also in light, possibly with respect to pillar one. And we may come to this later on. But to answer your question, I think it would go to court because it's so clearly illegal that a taxpayer would not accept an easy settlement here. That's my expectation.

I know it's early in this process, meaning this just came up say in 2020, but is there any indication of types of companies they're targeting or types of transactions? Because to your point, I mean, looking backwards to 2013 and trying to capture all of this is the near impossible task. Is there any indication of types of multinational that they're focusing?

And Ryan, I think that's a very good question because for applying an equal treatment you need to have a certain concept. And I don't see this concept that you target certain types of companies or target certain transactions. There could be a coherent system to target to say, for example, okay, we just look at certain patterns or we don't look at software, et cetera, these things. But to put it that way, I don't see a certain concept or a certain strategy. I think it appears a little bit what the companies who basically come up and notify the authorities, those are the companies which will be investigated against.

Them. So let me ask this question before we get into talking about deviating from norms and what we've seen. So if I'm a tax director, I've got a multinational that has operations in Germany, but I have IP and I'm using completely outside of Germany, that's registered in Germany. And I come to use Johannes, Kerim and I say, "Listen, I'm concerned about this rule. What should I be doing? What should I be looking at? Because I don't want to be hit with an adjustment in Germany that I have to now deal with, or an audit that I have to now deal with because I'm licensing IP that has absolutely nothing to do outside of Germany, but it's registered in Germany." So what are the practical considerations for me as a tax director?

It seems to be just as quiet as a church mouse.

That's the advice.

David, to your question, this discussion obviously has come up a lot of times in 2020, and usually a good approach is to go with the hurt, to do with what others do. And usually the approach would be to disclose the effects which you consider relevant, but at the same time, going to your example, to explain the authorities that these IP rights were not used in Germany, though they have no value for Germany. So Germany cannot tax them. I think that's quite critical at the same time, it would make sense. And then I would hand over to Kerim to basically have a robust strategy with respect to the quantification that's equally important. And we haven't discussed this so far.

If taxpayer A buy a property from taxpayer B, the authorities are required to determine both the soil and the building explicitly. So if that is true, it's also true if there is an IP agreement with, I don't know, 1000 rights and the authorities need to determine every single right in order to establish the tax actually, that's quite important. And what I mean by that is they basically just make estimations, which in my view is not committed because you simply first have to investigate as much as possible before the authorities could basically estimate. But at the same time as a tax director, you want to have a robust quantification, which shows the amounts, which could conceivably in a worst scenario, be attributable to Germany. Kerim, I think that is basically then where you would come into play.

Yeah.

Yeah. So Kerim, please walk us through that because I hear Johannes and I'm like, this rule is ridiculous. It sounds illegal, but I'm not going to litigation tomorrow. I want to deal with my tax risk now. So what are we doing to value this? What are we doing even if we say, "Okay. We're going to pay some dominimous amount so that we don't get into trouble. What am I doing at this point?

Yeah. So this is exactly the point where we came into play. So learning about this legislation, trying to understand really what is it, with what we wanted the price. And there was not much guidance at the beginning, not beyond... Even for lawyers. Something like, this is legislation, can you please give us a value? We was like, "What is it?" So we had lots of discussions around that point and we figured, well, the law says an income or an income stream that connected to that registered IP. So then you start figuring out what does that mean with your example, either a license payment for country A to country B or a disposal of IP from country A to country B. But usually that's a huge bundle that is not just what's happening in Germany.

And here comes another element. Usually when we from evaluation or transfer pricing perspective price or value things, we're looking for value, we're looking for market price. We're not looking for just splitting numbers which did exercise at the beginning sounded like it is to be. Saying there's a price for that transaction. Now I want the piece that's connected to a German registered IP, but is it the value or not? That's not really answered and therefore to adapt to this a bit. And there is not a clear view, whether there should be a value waste pricing, or there shouldn't be a value waste pricing.

And if it shouldn't be well, then we start saying, this is a price. There's a license payment. There's a bundle of IP, how sometimes services embedded in there. And we really break that down. We really break that down to say, there is a proportion of that, that's really just connected to the registered IP. That would be one approach, but it doesn't answer the question, is that supposed to be part of a Germany? Because obviously it isn't otherwise we would have a transfer pricing issue as well.

So it just says there is some connection, but it's not answering the question of value. And if you go the next step Johannes, you tell me whether legally there is an opening for that. If you say, well, maybe trans pricing principles can be adopted or valuation principles can be adopted. And there is a lot of opinion out there that might be the case, but then we're saying what value had the registration in itself? And that where it becomes really interesting to say, what value is the registration in Germany as a proportion of that income stream.

And then that's what I tried to mention earlier. Some say, well, the registration is just a process you go through it, you register it. There's some calls, you pay a few lawyers and then you're done. So if you, again, adopt some transfer to it, some say that's really just a service and give a post plus and believe. That would be the extreme opinion. I believe some companies went that way. Maybe or wrong, but the finance ministry has clearly said, "That's not what we want to accept." It's not binding for us. Johannes, you correct me. It's not binding for it to us-

Yeah, absolutely.

... but that's going to be their assessment in an audit scenario. So that could be, let's say if you want be a company that goes smooth through an audit without assessment, that would been extreme scenario and probably not accepted in an audit, even though you may be right.

And Kerim, maybe just something we talked about as we were preparing for this is just the overall concept that the law assumes that there's value there. It's taking a revenue stream and attributing a portion of the revenue stream to the registration versus actually economically evaluating if there's value and maybe a concrete example of that is something else we talked out where if you have a German registered patent and an EU registered patent, there's some duplicative nature there. So as an economist, looking at that and saying, if you're getting the same protection from an EU registration, then you are from a German registration. Does the German registration have any value? It's making the assumption that the is value there. And I think that's ultimately, one of the questions is, are you just assigning a portion of an income stream or are you really asking us to determine value? Because in some circumstances the value could be zero.

That makes it difficult. From a value perspective, if you adopt those concepts, we would say, well, there are alternatives. So if you know that this costing you money because of over withholding tax and you have alternatives, you go with the alternative. There were statements from the tax authorities or minister of finance saying, even if it's registered European-White, we still consider that as German registration. So it just shows that they're really moving away from a value based analysis there. But having said that still in the circular they're published, they're suggesting... So they're not ruling out any type of apportionment that goes into that direction, because they defined what I just mentioned just looking at the cost as a bottom approach. Let's take it as a definition, whether it's a right term or not, but that's what they're using.

And they're saying, "We don't really accept that. We want to have it to down approach." Saying, starting really with the income stream and then saying, we want have a logic to break that down to the registered IP. And if you break it down, we have some cases where we came up the same value. So doing both independently, and that's not companies trying really trying do the right thing and not be in trouble. They say, "Well, let's just calculate both ways and see where we end. And then we can propose to the tax authorities with we've been diligent." So you may come up with the same answer, depends of course, on the industry, but what the top down cost then means the saying, we'll start with the payment and the payment may be a bundle of IP how management services, and then we'll break it down.

We'll break it down and say what proportion of that is actually just Germany and what proportion of that revenue you is just the registered IP carving out of other items of that impact the license. And then you still have a value that is attached to a price, that is attached to a value creation. It's still the IP value of that registered IP. Now for TP principles, we would say, if you want to have that, you'd usually try to understand who's created that IP. Who had the chronic rights to it. And that's what we call the [MP 00:24:03] analysis in the OCD framework.

So maybe taking one step further, if we are all to apply that MP analysis, then the registration itself is again, only the protection. And I'm saying only protection can be routine can be valuable. So if we're saying it's just the act of protection, again, with the cost plot saying, well, it's just a cost analysis. If we're saying, well, what value does the option provide of a country giving you the right to protect IP? That's maybe something slightly high. That's something you could adopt as at least some logic to it. But maybe to the link, this goes somehow into another discussion, which other countries used as what we call or what they call location specific savings. So it's like the right to protect IP, and we want to know the price or value for that you are generating related to that. So it sounds to me a lot like that concept we heard from the emerging countries.

So Kerim, if I can interrupt you here quickly, this brings me to one of my favorite topics in transfer pricing and it's double tax incompetent authority. Listening to what you and Johannes and Ryan have walked through it, seems like you could have several different jurisdictions claiming the same value from that income stream. You could have Germany stepping on. If we use the example with China and Indonesia could be stepping on someone else's rights or taking a portion that some other jurisdiction believes it's theirs. Is competent authority an option here? Do you think whether it's doing it on the front end with some APA or on the back end, after you end up with controversy in some map procedure, do you think that makes sense for this issue?

If I jump first, I don't know, because it really... Imagine it goes somehow back to what do they trying to tax? Are they trying to tax profits? Then we are like in a value based analogy. And I think it's a double taxation and I would show to you because I'm not a lawyer, but if they just say there's an income stream, there's a price. I want to have a good holding tax on it. I'm not sure there is a double tech. They're just texting it but I stop here because I'm not the lawyer. Johannes has probably much better ideas is that I have.

Yes. I would think that double calculation occurs in many instances, actually, especially if you have a license and the royalties are actually based on the gross amount. So there is no deduction possible. So this would be a text on the licensee but at the same time, it would be a tax in the licenses law jurisdiction. So that would be in my view clear double taxation and would also be not a net taxation because the authorities would actually take the gross amount. They would not allow deductions, which is actually against EU law but they don't care in these circumstances. But I would think a map would be a very intuitive tool to protect the respective taxpayers here, because it's clearly a double taxation.

Given that, do you think Germany will focus its resources on situations where the royalty is being paid to a non-treated country?

That could be true. If it's a non-treated country, then it would be tricky. But then I guess even if it's a non-treated country or a non-treaty protected entity, apart from map, there would still be EU for example, which protects this non-treated protected entity, by the way, that's also an interesting angle to that.

Listening to all this, I hear there's a lot of uncertainty as to application. Johannes thinks it might be unconstitutional. Kerim and Ryan say that it's impossibly hard to value, and you have this range of possible outcomes. It's very difficult other than through affirmative disclosure for the tax authorities to really understand what's going on because it's typically a payment outside of the German system. So if I'm somebody out there who ordinarily thinks, yeah, I want to follow the herd. I listen to this and I'm thinking, here it sounds like the herd is marching toward the lions. What happens to me if I don't do this and I just wait for others to let their cases percolate through, am I putting myself at greater risk?

And I guess to add onto that, what is the bigger risk or what are the larger chances that a company's going to be surprised? Is it that there is any tax liability at all? Or is it the amount that they'll have to pay?

I would usually think that, I mean, it depends on the specific facts but you would usually want to disclose because you have a variety of different risks, if you don't disclose in time. You would either have an interest risk. You would have another other liability risks you would have potentially also corporate risks. So you were usually forced also under compliance law and also, which is also recommendable to disclose, to go with the herd. Okay. You go basically to use your picture to the lion. Yeah. You narrow to the lion but on the other hand, I mean, there, there would be somebody, a hunter who basically protects you against the lion, and that would be the European Court of Justice I would say. So you're not unprotected against the lions, I would say because the lions are also subject to certain rules.

So clearly this law seems to deviate from a lot of the international norm on this topic, but do you foresee other jurors to saying, if Germany could do this, we can too in following this trend, or do you think most jurisdiction are going to see the problems and not even take the risk to implement similar laws?

And as an add-on, what are the reactions from other jurisdictions that you're seeing to this German rule?

Right.

Let's see, Johannes, you have you on this or an opinion?

I have not heard of any reactions of other jurisdictions on this so far, but Nate can speak to this as well. I would think that you would be very interested in this if it picks it up. I would also think that it's clear really in violation of pillar one, because in essence, it works like a DST, a Digital Services Tax, because as Kerim said, you basically look at the royalties attributable to a certain market jurisdiction, which is similar to a digital sales tax. And that's exactly what should be abolished before pillar one should come into play. So at a certain point in time, I would assume that all jurisdictions would be interested in this tax. That's my expectation.

And I think going back to the map point, this is why if I run into problems with this and in Germany, I would really want to go to competent authority just to get the view from another jurisdiction. Because if nothing else, just the uncertainty and the difficulties we've talked about, I think would make the other jurisdictions ears perk up because if nothing else challenge on the, how do you value this and why should this value be assigned to Germany? And I think you get to a point and say, okay, maybe it's just a cost plus if we talk about the protection. But it's certainly an interesting one, given how difficult it is to enforce how difficult it is to prepare for. And the question I would have, is Germany enforcing this? Do we have situations where taxpayers are now dealing with an audit around this?

My experience on that is, I mean, the communication is clear still they're going to enforce it. That's at least in the circle. So there was a stage where expecting a circular which would give ease to all this, but in the reverse happened and they were clearly stating they're going to enforce this. And then the guidance they've published, which are binding for tax authorities gives you also outlined what do they do if a company doesn't provide enough information. Doesn't indulge all the numbers required and doesn't cooperate and then comes the right to basically estimate this amount which basically only takes a payment made and allocates the German proportion just based on sales generated. So it's an easy way, and that's like in the documents in there.

So it gives enough power tax authorities to not just enforce, but also to estimate a value if companies are not cooperating, which is of course, a high hurdle to say, my opinion, as long as they're meaningful work done. And as we're doing with the client approaching us, that we are creating different ways of valuing this amount, even if we're arguing strongly, that one is better than the other. I think it's hard to say they're incorporating, but at least there is their instruments in place. So I would say at the moment, the risk of data that they're enforcing, but of course, with all the legal options companies have to push back on that.

To elaborate on what Kerim mentioned and probably to further a comment about the hurting mentality. I know one of the most recent examples we had, it was a company that probably didn't have a whole lot of risk in this area, but they qualified for the tax. They had German registered IP and they chose to file the exemptions. I mean, they were with the treaty country, they chose to file the exemptions, submit everything. And just because they didn't want to be in the line of fire if, and when something was to get enforced. And I think from that perspective, from evaluation stand point, we were doing that when things were evolving before the 2021 circular had come out, but still we needed to put some value associated with what the IP was valued. And we put forth the cost approach.

And I think without the benefit of that guidance, I think that it's a fairly principled standard approach to it to say, "Hey. This is a routine function, and we're going to treat it as such. We're going to apply a method that shows that it's routine." And we did more than simply taking the registration cost marking it up. There was a more robust effort to identify costs, but I think they wanted to put their stake in the ground and say, "We did all we had to do and get out of that bucket of that line of fire to say, we did it versus not doing anything." They've at least put forth the effort. And that's at least one example of number one, the hurting mentality. But two going against the grain in terms of using a method that clearly isn't preferred by the taxing authority.

Right. That was before we knew that they categorically doesn't don't allow the cost approach. Although, there are variations of that. So they just mentioned cost approach. But I think the assumption is it's only the registration costs. When we talked about the cost approach, it's of course also the protection costs in there. So it's much more than just the registration.

The treaty angle is an interesting one, because for those that have been following the issue for a while, it's I think fairly clear that if you're in a treaty country, you're better often. I think the German tax authorities have been at multiple levels, more flexible with royalty recipients that are in treaty countries. But maybe Johannes for those that are new to this issue, talk a little bit about how they've dealt with situations where ultimately, of course, people didn't that they were subject to the tax because the ideas brand new. Even though the law's been around for 100 years, but if you were to apply it would be zero or a low withholding rate anyway.

Yeah. And that's a bit unfortunate as well, as you said, Nate, most taxpayers applied for exemption certificates also retrospectively, which is new because usually you would apply for the future. So far based on our experience, we haven't received any exemption certificate from the authorities after almost two years, even in crystal clear treaty cases. So one gets little bit the impression that answers lead to new questions. And also in terms of enforcement, it's unfortunate that this enforcement is imminent because if I put myself into the truth of the authorities, I have here law which has never been applied in that way. All of a sudden it comes up and I am supposed to apply it retroactively since 2013. I would've thought it would be wise to wait a little bit, to see where things stand with all taxpayers, wait for the status report until June, and then decide what to do.

Because once you enforce now, it's very difficult to say, "Okay. We abolish it now or not." It's very tricky. And it's extremely burdensome, not only for the taxpayers but equally for the authorities. And one thing is also clear, there is case law, the EU out, which states that if a government applies law, which violates EU law, the government is liable as well. So it's not a one way street. So I think it would've been more prudent to wait until this report has been finalized in order to get a better overview. I think it's also obviously to go back to our first point, quite unfair, and then unequal treatment to single out certain taxpayers based on criteria nobody knows and try to tax them whereas others have not even disclosed anything.

What's the problem on the exemption certificates? Is it that they are raising legitimate questions or are the tax authorities, just the dog that caught the car. Now of a sudden they're overwhelmed by exemption certificate applications and they really don't know what to do with any of this as they weren't planning on enforcing it either.

Yeah. I think they are maybe a little bit like the doc you mentioned, they're overwhelmed. And I think the taxpayers need to be sure that they don't fall into any certain phishing expeditions. I'm not saying that there are phishing expeditions, but I think every taxpayer needs to be careful that taxpayer only responds to foreseeably relevant questions in this respect. So in other words, going back to our China-Indonesian transaction, I would've thought that a question which requests information on all reorganization since 2013 would not be relevant in relation to the German IP question. So that's one thing. And if you are in this pattern, you would become again, questions, questions, answers, and questions. So it's a little bit of a trap I would say.

I think we get to the point with a lot of this and not flip it but as we walk down the road, it's always, I don't know. And that's not how you want your tax rules to work. It's one of these things where there's a lot of confusion. So as we're coming to the end of our time, just practically speaking as taxpayers who may have operations in Germany, or may use IP, that's registered Germany, going back to an earlier question. What is the practical advice? From evaluation standpoint and I love the examples, Ryan, you walked through about the anecdotal, this is what we did, but what should I be doing?

I know I have to stay with the herd. I know there are potential punishments if I just don't register and that could be an easy, got you. What should did I really be doing? And to walk through, follow the herd, do evaluation, even if it's not exactly in line with what tax authorities have put out. And if I'm in a treaty country file for my exemption or look to map, or maybe even early engagement with the company authority at the level of APA. Is there anything else I should be thinking about if I'm a cautious tactic or facts director that doesn't want to end up in litigation?

I think one point which is equally important is to be aware of these rules going forward. If you have now a reorganization which covers potentially German IP and most transactions cover potentially German IP, then you want to be sure that those transactions are structured in a way that they don't qualify for this post or license for German IP. And that's entirely possible without having an abusive structure or anything because there are certain disposals which are not caught by this rules which are, for example, contributions without issuance of new shares. There are clear ways how structure and that's quite important not to go into any trap if you have future transactions. I think that's equally crucial.

And Kerim, Ryan from evaluation standpoint?

My view on this is really coming out of some discussions with clients, narrows down to one approach that most of them end up following is if you are already in this situation that you are subject to this law. So we are talking about clearly being able to restructure things. Well, then in order not to be at too much risk, you file your position. And what we do is usually we run different analysis. So we don't want to be just to an extreme case where we already know that tax authorities are not in favor and they're not even like... Because it's binding to them, they won't be able to accept it. So we'll actually follow that but of course, we do it diligent way and see how far is really the amount tied to the German registered IP.

And sometimes it's actually not as much as before. It depends on the industry. Sometimes it's a lot. But do that, make your case and worst case-

It's just sometimes the rules are like that. But you have to fight for your right, worst case. But at least you have a substantial good case in your hand, you can happily defend. Someone has to go that, I guess and someone will.

Yeah. I think from my perspective, I may have mentioned it before. I fall back on taking a principled approach and whatever position you take, I think reasonable and defensible. So to the extent you can assess your risk under the different methods. There's always this give and take of resources and time and money to getting perfect information, but take the approach where you figure out your book ends. Take a reasonable approach that you can put your best foot forward and it's defensible.

And if you're applying sound economic principle, I think the end, it should win the day. And I think about it, this is a German issue. We have these bigger tax landscape changes that are occurring and we talked about pillar one. And other things like what do you ultimately fall back on as maybe these levers are shifting. Maybe keep that in the back of your head. And like I said, I fall back on principles and a reasonable approach.

I may actually also just circle back because I didn't want to end up with the core option as the final word of me. So of course the hope is that in all this scenario, if you have good arguments be we can solve this. And quite often we do in other cases. So why shouldn't this be successful as well, as long as, as Ryan said, we have a reasonable position? And you mentioned if the map option is available, then of course we'll put you that for. So don't let me close down on the court option. That's never the preferred option. So we usually solve the [inaudible 00:45:11].

You do want to be someplace where you can start the conversation yourself with your own method and not leave it to the tax authorities to start there. So exactly as much as I would like to be the lone water, buffalo wandering myself, I get the, follow the herd strategy.

Reluctant to admit it, this goes back to point we made, I think.

You know I never want to follow the herd anytime. Anyone says, "Follow the herd." I wander away.

We've all seen the nature shows. The one buffalo away from the herd is the one that doesn't make it to the end of the migration story.

That's just the one they film. I'm sure there's buffalo everywhere that are doing great, living lives of solitude and peace. Thanks everybody for joining.

So the advice is don't get filmed being away from the profane.

Precisely.

Indeed, Nate. Thanks everyone for joining. This has been great. And to our guests, thank you so much for coming on. We hope to have another session to talk to you guys again. As usual, this is GILTI Conscience. Thank you all.

Bye.

Thank you so much.

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